Shopping for a house is exciting. However, taking steps toward homeownership can be stressful. A home loan calculator can help you remove some stress. It’s an excellent tool to see how much house you can afford. However, the cost of a home goes beyond the listing price. You must also consider the impact of interest rates, mortgage insurance, and property taxes on your budget. 

A home insurance policy is another cost of homeownership. Insurify can help you compare rates from top insurance companies to save money and get the best policy for your dream home.

Home Loan Calculator: How It Works

If you’re in the market for a new house, you’ve probably come across a few home loan calculators. A calculator is helpful in your search for a loan. It helps you estimate your monthly mortgage payment and the total cost of your loan. 

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Not all home loan calculators are created equal. For instance, one calculator may estimate your costs using only the home price, loan term, and interest rate. But lenders often roll property taxes and homeowners insurance into the total monthly payment through an escrow account, which can increase the amount you pay.

Another expense you may have is private mortgage insurance (PMI). Lenders require it if your down payment is less than 20 percent. The average cost of PMI is between $30 and $70 for every $100,000 you borrow. On a $220,000 home, PMI can add $60 to $140 to your payment every month.

Home Loan Calculators and Interest Rates

The mortgage interest rate is the fee that lenders charge in exchange for borrowing the money to purchase your home. Homeowners prefer lower interest rates because it saves them money over the life of the loan. Many factors influence the interest rate, including:

  • Your credit score
  • Mortgage term length
  • Interest rate type
  • Economic conditions

Your Credit Score

Your credit score is a measure of how creditworthy you are. It might be higher if you have a history of on-time payments and have a low debt balance. If you miss payments and rack up a large balance on your credit cards, your credit score can drop. Generally, banks give lower interest rates to borrowers with higher credit scores.

Mortgage Term Length

Mortgage term length is the number of years it will take you to pay back the money you borrow to purchase your home. The most common mortgage terms are 15 or 30 years. Banks view longer terms as riskier because there’s a higher chance that you’ll default on your loan. Thirty years is a long time, and you could lose your job, get divorced, or suffer ill health. That’s why a 15-year mortgage loan typically has a lower interest rate.

A 15-year term can also save you money because you’re paying interest for half the time compared to a 30-year term. If you’re shopping for a new home, use a mortgage payment calculator to compare the cost of different term lengths to see how much you could save by opting for a 15-year term.

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Interest Rate Type

Mortgage loans have the option of two types of interest: fixed and adjustable. A fixed-rate loan has the same interest rate for the entire repayment period. It can provide more stability because your payment amount stays the same from month to month. With an adjustable-rate mortgage (ARM), the interest rate can go up or down depending on market conditions. 

ARMs have an initial period where your interest rate remains the same. However, after the initial period expires, your rate can vary significantly from month to month or year to year. Because your total payment includes interest fees, the dollar amount can go up or down. Fluctuating payments can make budgeting difficult. If you opt for an ARM, refinancing to a fixed-rate mortgage might make sense if the rate climbs too high or you want a more stable payment.

Economic Conditions

Economic conditions play a role but can be unpredictable. Government financial policy and supply and demand can cause interest rates to change. For instance, 2020 saw a drastic change in interest rates because of the coronavirus pandemic. Businesses were forced to shut down, causing a high unemployment rate and a slow economy that couldn’t have been predicted. The Federal Reserve made a few quick changes that put pressure on rates, and mortgage rates dropped to historic lows.

Down Payment Best Practices

Larger down payments can mean lower interest rates. When you put more money down, you have more stake in the property, which lenders equate to a lower chance of you defaulting on your mortgage. Because the perceived risk is lower, banks reward you with lower interest rates.

The rule of thumb is to put down 20 percent of the purchase price because lenders require PMI if your down payment is less than that. However, according to the National Association of Realtors, the median down payment in 2019 was 12 percent for all buyers and 6 percent for first-time buyers.

Your down payment can depend on how much savings you have and the loan type you choose. FHA loans allow you to put 3.5 percent down, while a conventional loan lets you buy a home with as little as three percent down. If you qualify for a VA loan, you can purchase a house with zero down payment.

Features to Look for in a Mortgage Calculator

When using a home loan calculator, keep in mind that the quality of the calculator matters. Your monthly costs can include more than the mortgage payment. You may not get an accurate estimate if you don’t include property taxes, property insurance, and PMI.

An amortization schedule can come in handy, too. It provides a payment schedule of the mortgage over time and includes a payment breakdown of the dollar amount that goes toward the principal and interest until you pay off the loan.

Home Loan Calculator FAQ

How much house can I afford?

Buying a home is a major personal finance milestone. However, investing in real estate is a major expense and requires careful consideration of your financial picture. How much house you can afford depends on your income, monthly expenses, debt payments, savings balance, and credit score. Lenders use your debt-to-income (DTI) ratio to help determine the amount you can borrow for a mortgage. DTI measures how much money you have left after you pay your bills each month. Let’s say you get lender preapproval for a $220,000 loan amount, and you have $20,000 in savings to use as a down payment. You could potentially afford a $240,000 home because the total amount you borrow wouldn’t exceed $220,000.

What’s the best mortgage term length?

Mortgage term length is an important decision. A 30-year term stretches your loan over a longer period, which can lower your monthly payment amount. However, a 15-year term costs less because you pay fewer interest fees. Which is best for you comes down to affordability. If you need a lower monthly payment, a 30-year loan might be better. A 15-year home mortgage makes more sense for homebuyers who want to pay less in interest payments. Your term length isn’t set in stone. You can refinance your 30-year home loan to a 15-year term if you change your mind.

How much are closing costs for a new home?

Understanding closing costs can eliminate surprises and improve your home buying experience. Closing costs are fees and expenses you pay to close on your house, and the amount can range from two percent to seven percent of the home’s purchase price. Typical closing costs include fees for an appraisal, credit report, and lending origination. It can also include application fees, title search costs, property taxes, and home insurance premiums.

Mortgage Calculator: The Bottom Line

Home loan calculators are helpful tools when considering a home purchase. They can show you how much home you can afford and compare term lengths to help you decide which loan term is best. 

When you find the house of your dreams, don’t forget to shop for homeowners insurance through Insurify. One confidential form lets you see multiple rates side by side to select the right coverage option for your new home.

Updated August 5, 2020

Amy is a content marketing writer who specializes in personal finance and technology. With a background in the legal field, she has a talent for transforming complex topics into content that’s easy to understand. When she’s not writing, she enjoys reading and playing board games with her family. You can learn more at amybeardsley.com.